The Financial Times Lex column on the: US Economy, dated 17 March 09, stated that the outlook for consumers and for any increase in consumer spending is pitch black and in need of serious deleveraging.
According to the Federal Reserve data on the 4th quarter ’08, the consumer’s household balance sheet is bloated by a ratio of total gross debt to personal income of 133%. Compare that to an average of 90% during the 1990’s and you’ll appreciate the magnitude of the problem.
The Lex article states: Assuming no changes in household income, returning to the 90% ratio requires consumer liabilities to fall by $4.7 trillion, an amount equivalent to about a third of US gross domestic product.
The columnist then surmises that it is likely that the families most in debt have few financial assets to sell which means that deleveraging must occur through increased saving. The trouble is the latest Fed data show that at current savings rates it would take 50 years to return the overall debt-to-income ratio to 90 %. Saving rates, therefore, have to rise much higher. He then concludes that higher rates of savings will be painful and that we should expect to see many more shuttered shops.
While I agree with his analysis, I would add my own observation that bankruptcies and foreclosures would also result in deleveraging and the subsequent debt relief from exercising either or both of these alternatives would hasten the return to an overall debt-to-income ration of 90 %. However, even with the combined deleveraging effects of bankruptcies, foreclosures, and increased savings, in my opinion it will take a minimum of 10 painful years to return to the 1990s average of 90%.